Wednesday, April 30, 2025
Subscribe
Home Blog Page 137

Ghost Bites (MTN | Murray & Roberts)

The Finance Ghost
-
0
Ghost Bites (MTN | Murray & Roberts)

Another African nightmare for MTN?

There’s never a dull moment when doing business in Africa

There are three certainties in life: death, taxes and African governments trying to fleece multinational organisations for money. We are used to this in Nigeria, a country in which MTN has a long and often painful history. Just when we thought the troubles were behind MTN, the FOMO has become too much for Ghana and that government has decided to have a go.

This isn’t a small issue, either. MTN’s subsidiary in Ghana has been issued with a tax assessment which infers that MTN under declared revenue by around 30% over the period of 2014 to 2018. It seems outrageous that this could be true. Unsurprisingly, MTN Ghana “strongly disputes” the assessment, which was based on methodologies like call data records, recharges and other data.

How much are we looking at here? Well, the Ghanaian government has issued an assessment for $773 million. That’s a lot of money.

The announcement came out after the market closed on Friday, so I’m expecting some pain in the share price when it opens on Monday. I still believe in what MTN is doing in Africa and I’m a shareholder. Sadly, these sorts of issues are a reality when operating in high growth, risky markets.

Before you are tempted to suggest that MTN should pack it in and focus on South Africa, I would remind you that our cellphone towers currently stop working after about 2.5 hours of load shedding and our economy’s growth rate is slower than the annual egg-and-spoon race at your local frail care centre.

This isn’t an easy industry.

Murray & Roberts releases the Bombela circular

The embattled construction company is selling the Bombela Concession stake to Intertoll International

At the beginning of December, Murray & Roberts gave the market a glimmer of hope by announcing the sale of the stake in Bombela Concession Company for up to R1.386 billion. The purchaser is Intertoll International, a leading European investor in motorway concessions and related operations.

Nevermind a toll on the roads or railways – the economy has taken its toll on Murray & Roberts, with the company facing a liquidity crunch that needs to be dealt with urgently. The proceeds from this deal (assuming shareholders approve it) will be used to reduce debt and improve the state of the balance sheet in general.

Going forward and with Clough in Australia now placed into voluntary administration after a deal to try and sell that company fell through, Murray & Roberts will have two business platforms: Mining (a global business) and Power, Industrial & Water (focused on sub-Saharan Africa).

Murray & Roberts hopes to be able to deliver earnings growth from FY24 onwards, with the company acknowledging that this would be off a low base.

Here’s an ugly share price chart to make you feel better about your bad choices in tech stocks:

Little Bites:

  • Director dealings:
    • The CEO of Stor-Age has sold shares worth over R2.75 million, with the proceeds used to settle loan obligations to Stor-Age in terms of the old share purchase and option scheme for executives of the company
    • The financial director of Zeda (the mobility group unbundled by Barloworld) has acquired shares in Zeda worth over R150k
    • An associate of a director of Huge Group has acquired shares worth just over R20k

Ghost Bites (Mondi | Steinhoff – Pepco)

The Finance Ghost
-
0
Ghost Bites (Mondi | Steinhoff – Pepco)

Mondi completes the Duino mill deal

The deal was first announced in August 2022

Mondi is a good example of a JSE-listed company that has a significant international footprint. This footprint is growing, with the acquisition of the Duino mill in Italy now completed.

The total deal consideration was €40 million, so this is a very small deal in the context of Mondi’s market cap of over R146 billion.

This is a strategic deal for Mondi’s efforts in Central Europe and Turkey, as the mill is close to two important export harbours. There will be many changes at this mill, with plans to convert the existing paper machine to produce high quality recycled containerboard.

The estimated investment required for this project is €200 million, which is 5x the size of the acquisition price. This is a solid example of a company buying a base to work from.

Pepco: a window into Europe

The latest quarter is a reminder of what Steinhoff could’ve been

Pepco is owned by Steinhoff. It’s a great business. Sadly, it sits far down in the group structure, with a ton of debt sitting above it at group level. For that reason, the creditors are rubbing their hands in glee about this business, with shareholders set to be squeezed out.

Nevertheless, Pepco is a really useful barometer for the state of play in Europe, particularly in value retail. This means retail formats aimed at lower income shoppers who are highly price sensitive. In other words: most people.

In the three months ended December (the first quarter of this financial year), revenue was up 27% on a constant currency basis and 24% as reported. There’s a major effort underway to increase the store footprint, evidenced by like-for-like growth coming in at only 13%, well below the total growth (but still impressive). The difference between reported growth and like-for-like growth is the new stores that were added in the past year.

The excitement is firmly in the Pepco format, with growth up 19.7% on a like-for-like basis vs. only 4.4% at Poundland Group.

The growth in the footprint isn’t slowing down. There are currently 4,066 stores in the group and the rollout plan is for 550 net new stores in this financial year (including those opened in the quarter just reported on).

When growing quickly, the challenge is always (1) not going bankrupt from running out of cash and (2) maintaining margins. Holding company Steinhoff has already nearly achieved the first outcome, so hopefully lightning won’t strike twice. This leaves us with margins, which need to be watched closely. It takes a while for new stores to ramp up to the desired level of profitability, hence why EBITDA is only up “mid-teens” at a time when revenue is growing in the mid-20s, a clear example of margin contraction.

Investors (also known as the people Steinhoff owes money to) will be looking for margin expansion to come through as the store rollout matures.

Little Bites:

  • Andrew Waller (a name you may recognise from Grindrod) has bought shares worth R1.68 million in Spar. He is a non-executive director of the retailer.
  • York Timbers has clarified the extent of the shareholding of A2 Investment Partners. The activist investment group owns 11.12% in the company directly and controls a further 20.2% via Peresec.

Ghost Bites (Steinhoff | Tharisa | Telkom)

The Finance Ghost
-
0
Ghost Bites (Steinhoff | Tharisa | Telkom)

Why isn’t Steinhoff worthless yet?

There’s more bad news for shareholders

It really is beyond me why Steinhoff isn’t trading at zero. The creditors are essentially in the process of getting the keys to the castle, with shareholders likely to hold unlisted instruments as a best-case outcome. Yet, it’s trading at R0.53 per share, which is precisely 53 cents more than I would pay for it.

To reinforce my view that this is a donut (i.e. worthless), the latest news is that Steinhoff portfolio company Mattress Firm is no longer going to list in the US. It has withdrawn its registration statement with the US Securities and Exchange Commission (SEC), citing ongoing volatility in the IPO market.

As evidenced by layoffs at Goldman Sachs, this isn’t the time to be listing in the US market (or anywhere else, really).

It hardly matters, as the creditors will be patient and will wait for the next cycle. The brave few who plan to hold unlisted shares will be following the same thesis. The difference is that the creditors get to eat dinner first, with the shareholders lucky to get crumbs that fall off the table.

Tharisa was on the wrong side of the weather

“Unprecedented rainfall” (an annualised increase of 27%) has impacted production

In a quarterly production report dealing with the three months to December, Tharisa took a knock to both PGM and chrome output. There’s still plenty of cash on the balance sheet (net cash of over $101 million), so this was just a bump in the road.

There is some good news, like production guidance surprisingly being maintained for both PGMs and chrome. The other good news is that PGM and chrome prices have been holding up, which is obviously critical for miners.

The Vulcan Plant is on track for increased production and ground has been broken at the Karo Platinum Mine in Zimbabwe, after $31.8 million was raised for the project on the Victoria Falls Stock Exchange. And there you were, thinking that the Cape Town Stock Exchange is the most exotic place to raise capital. Trust me, there are many exchanges out there.

Drilling down into the numbers, quarter-on-quarter production fell 5.7% for 6E PGMs and 8.0% for chrome concentrates. Prices for the PGM basket and metallurgical grade chrome fell by 1.7% and 1.3% respectively on a quarter-on-quarter basis (i.e. vs. the three months ended September 2022).

Telkom and Rain have terminated discussions

Will Telkom ever find someone to dance with?

If you miss the existence of Ratanga Junction or the thrill of going to Gold Reef City in your holidays, you could always buy shares in Telkom. Take a look at this wild ride over the past year:

First, MTN was sniffing around a deal with Telkom. That eventually fell over, leaving space for Rain to get involved and irritate the Takeover Regulation Panel (TRP) in the process with poor behaviour. Having clearly hired better lawyers, things went quiet for a while.

After initial discussions but prior to any due diligence work, the parties decided to walk away from a potential deal at the moment. No further details were given.

The market seemed to like this, sending Telkom 9.3% higher on the day. With two major potential parties having walked away (for now at least), Telkom needs to find another potential way to unlock value.

Little Bites:

  • Director dealings:
    • Following the rights issue by York Timber, Peresec Prime Brokers now holds a 29.28% interest in the company. The value unlock story continues…in theory.
    • A director of Argent Industrial has sold shares worth R190k – it’s always dangerous to read too much into these trades, but load shedding must be biting these companies.
  • For those suffering from a December hangover and related memory loss, Impala Platinum released an announcement reminding the market that the only remaining condition precedent to the offer for Royal Bafokeng Platinum is the Takeover Regulation Panel (TRP) Compliance Certificate. Implats is still fighting with Northam Platinum at the TRP, helping several legal teams afford better holidays this year.
  • Labat Africa has issued more shares, this time a tranche representing 3.33% of shares in issue when the general authority to issue shares was granted. The funds are being used to expand the cannabis healthcare business and for general working capital purposes.
  • Having now appointed a Nominated Adviser (NOMAD), Kibo Energy has resumed trading on the AIM market in London.

Too much stock!

The Finance Ghost
-
2
Too much stock!

Margins are under considerable pressure at retailers who are now dealing with a fundamental swing in supply-demand dynamics

Turnover for show, margins for dough.

I’m borrowing liberally from golf folklore to bring you that catchy intro. If you’ve played golf, you’ll know how tough it is. If you’ve been reading any retail earnings releases in recent months, you’ll also know how tough that is.

A swing in supply and demand

Towards the end of 2022, the world found itself in an environment of high consumer demand and very limited supply. As consumers were flush with cash thanks to the Fed, demand for products in a gradually reopening economy was huge. Supply chains were a nightmare thanks to congestion at ports and ongoing lockdowns in China, creating a recipe for inflation and unsustainably high margins for retailers.

The supply – demand dynamics have swung wildly over the past twelve months, with the latest Black Friday and festive season shopping trends showing that retailers are having to sacrifice margin to achieve turnover growth. Everyone has stock (and usually too much of it), an issue compounded by a fall in consumer demand as stimulus waned and energy costs put pressure on household budgets across the world.

In recent Magic Markets Premium reports, we’ve looked at Lululemon, Levi’s and Nike. These global apparel giants operate in totally different product categories, yet the theme across the board is clear: margins are under significant pressure.

Where did the margins go?

I’ve lifted this chart from our latest Magic Markets Premium report on Nike:

Source: Magic Markets Premium, company filings

Other than some seasonality in the numbers, you can see that revenue isn’t a huge issue for Nike. The company is posting reasonable top-line growth on a year-on-year basis (the right metric in a seasonal business). Sadly, gross margin appears to have bought a one-way ticket to hell, with a recent trend that you don’t need a finance degree to understand. That yellow worm is headed firmly in the wrong direction.

There is simply too much inventory in the system, which means an environment of markdowns and SALE signs across the front of every shop. Another major contributor is the return of the wholesale channel, which Nike starved of stock (their exact wording) during the pandemic. Wholesale margins will always be lower than direct-to-consumer margins that capture the full value chain, so a swing back towards wholesale creates a mix effect that is negative for margins.

This isn’t just an issue for Nike. Most retailers are experiencing either pressure on gross margin (because of markdowns to compete) or operating margin (because they have lost market share while raising prices to protect gross margins).

Many are taking pain on both levels, which is why share prices have come under pressure in this sector, particularly for companies that have been trading at clearly elevated multiples.

Lululemon is particularly interesting

Lululemon is credited with inventing the athleisure category, taking yoga pants from the studio to the local coffee shop and charging a delicious premium along the way.

It’s been fascinating to see how the recent strategy has differed to the likes of Levi’s, which focused on hiking prices to protect gross margins. One would assume that Lululemon would have more pricing power, yet the company has chosen to chase volumes and give up margins along the way.

The net profit number is all that matters of course, which is a function of revenue and margins. Hot off the pressure is updated guidance from the company on its fourth quarter numbers, which will see revenue increase by 25% – 27% on a year-on-year basis. This is ahead of previous guidance.

Sadly, diluted earnings per share is expected to be similar to previous guidance, which means that margin contraction has offset any benefit of revenue being higher than expected. Indeed, gross margin is expected to decline by 90 – 110 basis points, a huge swing from previous guidance of an increase of 10 – 20 basis points.

Lululemon has done a great job of managing costs, with selling, general and administrative (SG&A) expenses growing below gross profit growth. This has offset some (but not all) of the margin pressure.

Chasing revenue has worked for Lululemon because the company still has incredible growth potential. For a business like Nike that is already a mature business in most key markets, margins are more important than top-line growth.

We are in a tough environment for apparel retailers. Tread carefully.

If you enjoyed this, you’ll love Magic Markets Premium!

Every week, we release a research report and podcast covering a different global stock. For just R99/month or R990/year, you can get access to the full library that now includes over 60 companies.

We cover the strategy, key bull vs. bear points, management team, competitors and recent numbers of each company, along with our views on technical trading levels and the valuation. Subscribe today and act with more confidence in the markets>>>

Russia – Ukraine at an impasse

Chris Gilmour
-
1
Russia – Ukraine at an impasse

To kick off 2023, Chris Gilmour delves into arguably the most important geopolitical situation in the world today.

The Russia – Ukraine war has reached the type of impasse that is unlikely to change until at least the northern hemisphere spring.

Ukraine is a small country (relative to Russia), but it has serious backing in the form of NATO and/or the US. That backing is likely to be sustained provided a) the resolve of the Europeans remains largely intact and b) President Joe Biden’s US administration manages to keep getting large aid packages to Ukraine passed by the US Congress.

If these two factors remain in place, Ukraine should continue to punch well above its weight, as its people are highly motivated and cannot be intimidated by Russia’s terrorist tactics.

Conversely, the Russian troops really don’t want to be in Ukraine. They are fighting a war that their political masters have set for them and they don’t have anything like the motivation of the Ukrainians. Many of the troops are part of Yevgeny Prigozhin’s Wagner Group, a shadowy paramilitary force. It is widely believed that Prigozhin recruits soldiers for the Wagner Group from Russian prisons, offering inmates reduced sentences or even freedom in return for fighting in Ukraine and elsewhere.  

Common sense tells a rational fighter when to give up and surrender. But Russia is not following a rational process in Ukraine. As mentioned in this column some time ago, Vladimir Putin is attempting to plug another “gap” in Russia’s natural defences. He will not be satisfied until Ukraine is wiped off the map and re-incorporated into a greater Russia.

But he has badly miscalculated a number of factors in this war, the end result being a gradual emasculation of the Russian state.

Sanctions: slow and steady

The first point to note is that sanctions are working, albeit extremely slowly, and the Russian economy is being very slowly strangled. That process will continue, provided the resolve of the Europeans in particular doesn’t falter in 2023 and beyond. However, as demonstrated by London sanctions watchdog Moral Ratings Agency (MRA), a large number of very high profile international sanctions busting firms are still doing business with Russia.

The worst offender, according to MRA is US drugs and healthcare giant J&J, but the list also includes HSBC, Goldman Sachs, Unilever and Procter and Gamble. If past history is anything to go by, most if not all of these companies will eventually be forced to pull out properly, unable to resist the welter of moral outrage against their continued presence in Russia.

But there’s a long way to go, as demonstrated in MRA’s graphic below:

Source MoralRatingAgency.org

It’s perfectly understandable from a narrow, purely profit-motivated perspective why many of these companies persist with their Russian presence. Doing business for western firms in Russia has always been immensely profitable and a lot of companies are loathe to give this up. But the same argument could have been applied in the case of western companies operating in apartheid South Africa up until the 1980s, when most companies eventually cut ties.

If the war in Ukraine carries on long enough, a parallel commercial war of attrition will eventually force most if not all western companies out of Russia.

Military performance: poor

The second point to note is Russia’s pathetic performance on the battlefield.

At the start of this conflict, western military commanders could scarcely conceal their excitement when it became clear that the Russian army was seriously bogged down logistically in its initial attempts to take the Ukrainian capital city Kyiv. That excitement quickly turned to cautious re-evaluation, however, when they realised that a humiliating conventional defeat for Putin in Ukraine could quite easily degenerate into some sort of nuclear conflict.

There is no doubt that if properly armed with long-range rockets for their HIMARS MLRS, the Ukrainians could wipe out any Russian positions in Crimea and elsewhere. And the Ukrainians are champing at the bit for such an outcome. But the Americans are being typically cautious about supplying such long-range ordnance for fear of some degree of nuclear reprisal. Just to dimension this, if the Ukrainians possessed rockets that had even a slightly greater range, they could completely destroy the Kerch Bridge that links Crimea to Russia. By then cutting off Crimea’s water supply from near the recently re-captured city of Kherson, the Ukrainians could effectively turn Crimea into semi-desert and there’s nothing the Russians could do about it.

Where will the gas go?

Lastly, there’s the question of Russian oil and gas supplies to Europe this year and beyond. Europe currently has plenty of gas in storage to see it through this winter, but if no Russian energy makes its way to Europe this year, next winter could be problematic.

But of course, it must be remembered that Russian gas in particular is not going anywhere if it doesn’t go to Europe.

Constructing very long gas pipelines to China and India will take many years and enhanced shipments of liquefied natural gas (LNG) to these countries require port facilities in Russia that don’t currently exist. And all the while, Russia is losing valuable billions of dollars (or roubles) worth of exports that aren’t going to be made up any other way.

Outcome: a protracted negotiation?

Putin realises that he’s in a hole and would love an escape route, an offramp.

The West mustn’t lose its nerve and attempt to persuade Ukraine to accept a badly-negotiated deal with Russia. To date, the Ukrainians have recaptured 54% of the land occupied by Russia since the invasion almost a year ago. Ukrainian president Volodymyr Zelenskyy has made it abundantly clear that any peace deal will, of necessity, require a return to pre-2014 boundaries. In other words, Russia must vacate Crimea and the Luhansk region of east Ukraine. The Russians will likely stick to an old-style Soviet script of negotiation that involved demands and threats but little in the way of actual substance. Just when their opponents have been worn down mentally and psychologically, the Russians will offer a meaningless morsel that will be grabbed by a desperate West.

That type of scenario must be avoided at all costs.

However, what this means in practical terms is that the conflict will likely drag on for years until the Russian economy can no longer prosecute such an expensive exercise and will have to accept unconditional surrender, with all that this entails.

At this point, the humiliation of Russia will be complete.

This article reflects the independent views and opinions of Chris Gilmour, which are not necessarily the same as The Finance Ghost’s opinions on these stocks. For equity research on South African retail and other stocks, go to www.gilmour-research.co.za.

Ghost Bites (AYO | BHP | MAS | NEPI Rockcastle | Premier Fishing | Schroder | Transnet)

The Finance Ghost
-
1
Ghost Bites (AYO | BHP | MAS | NEPI Rockcastle | Premier Fishing | Schroder | Transnet)

AYO gets fined again

The share price fell over 20% in response to a JSE censure and fine

The JSE has investigated a number of transactions between 2017 and 2019 that it believes have breached JSE Listings Requirements. In particular, the aggregation of related party transactions is an issue here, as the rule is that transactions with the same party must be added up and treated as one deal. This is for the purposes of assessing whether they breach the threshold for a small related party deal.

When it comes to deals, the categorisation of deals (e.g. Category 1 / Category 2) is based on a calculation that expresses the deal as a percentage of the size of the company. For related party deals, the threshold is much smaller as shareholders need to know that the terms of deals with related parties are fair.

In relation to various transactions that the JSE is unhappy with, a fine of R1.5 million and a censure have been imposed on AYO Technology.

AYO is upset about this, as the JSE previously fined the company an amount of R6.5 million for similar contraventions of the JSE Listings Requirements. More importantly for the company, a reconsideration application had been underway before the Financial Services Tribunal (FST). The company is irritated that it wasn’t given a chance to respond to the FST ruling to dismiss AYO’s application before the JSE announced this censure.

Either way, they aren’t on each other’s Christmas card lists. The right way for AYO to avoid this issue would’ve been to comply with the JSE Listings Requirements in the first place.

BHP concludes a scheme implementation deed with OZ Minerals

A four-week due diligence period has led to the desired outcome

BHP Group has moved quickly here, with the non-binding indicative proposal announcement having been released on 18 November. Approximately one month later, the due diligence has been concluded and the offer price of A$28.25 per share for OZ Minerals has been confirmed.

This puts an enterprise value of A$9.6 billion on the company and represents a 59.8% premium to the 30-day VWAP leading up to 5 August, which was when BHP’s first proposal was made.

The OZ Minerals board has unanimously recommended that shareholders vote in favour of the scheme, in absence of a superior proposal. As we’ve seen in some recent deals (like Gold Fields – Yamana), one can never ignore the risk of a bigger offer coming through.

It’s going to take a while for the deal to go through, with a deadline to satisfy conditions precedent of 31 August 2023.

There’s a substantial break fee of A$95 million payable by either side if they walk away from the deal, so there’s some degree of commitment that the deal will happen. Again, a break fee wasn’t enough to save the Gold Fields deal!

MAS’ pre-close update for six months to December

The fund’s largest market (Romania) is still attractive

With Europe expected to enter a technical recession in the first half of 2023, Romania’s real GDP is still expected to grow next year. Average wages in the country are largely tracking inflation, which is supportive for retail assets in the region.

MAS also has exposure to Bulgaria and Poland, so this is another great example of a Central and Eastern European property fund right here on the JSE.

Much like NEPI Rockcastle (see below), MAS has enjoyed strong trading in these regions in the first five months of the 2023 financial year. With Covid restrictions having become a distant memory, the malls are packed and people are shopping. Interestingly, footfall has recovered to 2019 levels, which perhaps reflects the different reporting period in this update vs. NEPI below.

Tenant turnover is way ahead of pre-pandemic levels, up 19% vs. 2019. Open-air malls are running at 22% ahead of 2019 levels and enclosed malls at 16%, so perhaps some psychological impact of closed vs. open spaces during Covid has stuck.

With occupancies slightly higher at 96.4% vs. 96.3% in the comparable period, things are certainly looking up.

Disposals of remaining Western European assets are progressing well, which will leave MAS as being purely focused on the Central and Eastern Europe regions.

NEPI Rockcastle’s pre-close update for the year

The shopping centres have made a “complete recovery” from Covid

With record net operating income (NOI) and tenant sales above pre-pandemic levels, NEPI Rockcastle is happy to put the nightmares of Covid to bed. Despite the tail-end of restrictions still impacting the first quarter of this financial year, NOI is expected to be 8% higher than 2019 and 18% higher than 2021.

This is despite footfall still being lower than 2019 levels, with year-to-date footfall in October coming in 12% lower than 2019 on a like-for-like basis. Although one can deduce that this means a permanent change in shopping habits, the MAS update above makes me think that this is just a timing thing, as the NEPI update includes the months at the start of the year.

Having recently announced some significant investments in Eastern Europe, the estimated loan-to-value ratio after these transactions is 36.5%, which is a very manageable level. The company is targeting a reduction below the “strategic threshold” of 35% in the next 12 to 18 months.

Speaking of the balance sheet, the group takes full advantage of the ESG movement by issuing green bonds at attractive rates, like a €500 million bond at a fixed coupon of 2% that was three times oversubscribed. Leaving aside any feel-good reasons, a rate like that is exactly why NEPI Rockcastle can justify the creation of a dedicated ESG department.

An upgrade by Fitch from BBB to BBB+ certainly helps with capital raising efforts.

The other major initiative this year was to relocate the holding company from the Isle of Man to the Netherlands.

Premier Fishing plays its own version of Squid Game

A deal to invest R95 million in squid business Talhado Fishing is on the table

Premier Fishing already holds a 50.3% stake in Talhado Fishing Enterprises and this transaction will take that stake to 80.65%. The deal structure is that Premier will invest R95 million in Talhado and the company will then use that cash to repurchase shares from Scofish, which currently holds 30.35% in the company.

Talhado is the largest squid player in the South African fishing market, with 15 vessels in the group and a cold room facility that can store up to 800 tons of squid.

Premier Fishing notes benefits of the deal like cost synergies, enhanced B-BBEE credentials for Talhado and an extensive international sales network that Premier will also look to access.

Talhado’s financial performance will hopefully improve considerably to justify this value, as the net asset value of the company is R23 million and the loss after tax for the year ended August was R1.9 million. It’s really not obvious why the valuation of the company is so high.

Schroder gives us insight into European debt terms

The impact of a rising rates cycle is clear to see here

Schroder European Real Estate Investment Trust has completed the early refinancing of the largest debt expiry in 2023, a €14 million loan secured against the Hamburg and Stuttgart office investments.

VR Bank Westerwald offered the most competitive terms, with a 4.75 year term and a margin of 0.85% above the benchmark rate (the 5-year euro swap rate). The interest rate is fixed for the term based on that margin, coming in at 3.80% per year.

The weighted average interest rate for the group has increased by 60 basis points from 1.9% to 2.5%, a reminder of how the rising interest rate cycle hits property funds.

Discussions are underway regarding the two other debt expiries in the next 12 months.

Transnet: of flying insects and delayed trains

The good news for our infrastructure is that the company is profitable

In today’s example of how some companies just can’t get anything right, Transnet released reviewed consolidated financial results “for the six moths ended 30 September 2022” – butterflies sold separately, I presume.

The results are released on SENS because Transnet has listed debt instruments. The more important consideration is that Transnet’s financial health has a direct impact on our mining companies, as infrastructure can’t be improved without money.

Revenue for these six flying creatures increased by 2% and EBITDA fell by 2.5%. The group is at least profitable now, with a profit of R159 million vs. a loss of R78 million in the comparable period. Cash generated from operations was R11.9 billion and capital investment was R6 billion.

Transnet Freight Rail remains the issue, contributing 45% of revenue and leading to Transnet not meeting the cash interest cover ratio of 2.5x that is required by lenders. A ratio of only 2.1x was achieved, with lenders thankfully agreeing to waive this covenant.

There are major steps being taken to deal with bottlenecks in the rail business. As a country, we can only hope this works out.

Little Bites:

  • Director dealings:
    • Mike Flax, one of the founders of Spear REIT, has diversified his investment portfolio by selling shares worth R38.9 million – his first sale since co-founding the group and acting as CEO between 2016 and 2018
    • The investment entity of directors of Ninety One has bought shares worth nearly £51k
    • A director of Argent Industrial has sold shares worth R120k
    • An associate of a director of Sea Harvest has acquired shares worth R66k
  • Although the JSE has approved the Northam Platinum circular regarding the offer to Royal Bafokeng Platinum shareholders, the complaint made by Impala Platinum to the TRP has now led to a delay in the TRP approving the circular. There can be no sympathy here, as Northam has certainly done everything possible to scupper Impala’s efforts. This soap opera continues.
  • In a major milestone for its exit from the Australian market, WBHO has entered into a settlement deed with Netflow Osars (Western) related to the performance guarantee obligations under the Western Roads Upgrade Contract.
  • Ellies has renewed the cautionary announcement related to the various discussions that the group is having to try and diversify its operations.
  • After a two year fixed term as Group Financial Director, Deon Federicks will retire from the board of Famous Brands from July 2023. Ms Nelisiwe Shiluvana will replace him, an internal appointment as part of the succession planning programme.
  • Pembury Lifestyle Group is trying hard to get back on track, with rezoning initiatives underway for certain properties and plans in place to try and finalise the 2019 audit and of course the subsequent years as well. There’s still a long road ahead, though.

Ghost Bites (BHP | Grindrod Shipping | Kore Potash | MC Mining | NEPI Rockcastle)

The Finance Ghost
-
0
Ghost Bites (BHP | Grindrod Shipping | Kore Potash | MC Mining | NEPI Rockcastle)

BHP is finalising documentation for the OZ Minerals deal

The exclusivity period has been extended until 27 December

Well, whoever is working on this deal clearly isn’t having much of a Christmas holiday this year. Welcome to the world of corporate finance, where holidays are mainly just a myth designed to keep you motivated.

Having entered into an exclusivity agreement with OZ Minerals Limited towards the end of November, BHP has moved quickly to conduct a due diligence and confirm the proposed cash price of $28.25 per share. The outstanding step is to finalise the scheme implementation deed, for which the parties have agreed to extend the exclusivity until 27 December.

Importantly, the boards of both companies still need to sign off on the deal. It’s entirely possible that it still falls over at this stage.

Grindrod Shipping seems to be sticking around

If you’re still holding shares, be careful of liquidity

The offer by Taylor Maritime Investments for all the shares in Grindrod Shipping has closed. The important news is that not all the shareholders accepted it, which is exactly why offerors like to use a scheme of arrangement as an “expropriation mechanism” that binds the shareholders to the outcome if the requisite voting threshold is met.

Instead, we have a scenario where Taylor has moved from a shareholding of 25.29% to 83.23%. This is an awkward level, as there is not quite enough of a free float to meet JSE Main Board requirements, yet there is enough to be irritating.

The announcement warns shareholders that a delisting may still be in the pipeline. Liquidity may become problematic in this counter, so just be careful if you are sitting on a significant holding. That bid-offer spread can become very painful.

Kore Potash seems to still have support in Republic of Congo

When African governments start with nonsense, investors need to be wary

Let’s not mess around here: we are all very aware that Africa is fraught with corruption. Right here in South Africa, corruption is practically a national sport.

I was worried when Kore Potash first started reporting on what I can only call “weirdness” from the Minister of Mines in the Republic of Congo. The Minister has expressed concern at slow progress on the project, which is a little odd as Kore Potash has made plenty of progress with the Summit Consortium in putting the money and development plan together.

The Minister also complained about the administration of the local subsidiaries of Kore Potash, which led to the company hiring lawyers for two independent reviews of the corporate affairs of these subsidiaries. The reviews will be completed in January.

In the meantime, the management team got on a plane and met the Minister in the Republic of Congo, which seems to have gone well. In the world’s most carefully worded SENS announcement, Kore Potash highlighted that the Minister expressed his “thanks for how the company responded to his most recent letter” and reiterated that the company has the support of the government to develop the project.

Well, let’s hope that will be still be the case in 2023.

MC Mining extends its marketing agreement

This is a great outcome for Uitkomst

MC Mining’s Uitkomst mine produces coal of sufficient quality to be exported, but not enough of the stuff to fill a ship on a monthly basis. This previously created a frustrating situation in which the company couldn’t access the international coal market, thereby losing out on the far higher export price vs. domestic prices.

A marketing agreement with a company called Overlooked helped address this issue. The agreement was due to expire at the end of December and has now been extended to June, with the key terms staying as-is.

The way the deal works is that Overlooked handles the transportation, stockpiling and export of coal at the port. The fee for this service is 5% of the sales price, which seems pretty reasonable to me.

Notably, this is a related party transaction as the CEO of Overlooked is also a director and substantial shareholder of MC Mining.

One wonders if there is a deal coming down the line for the company to acquire Overlooked. We will have to wait and see.

NEPI Rockcastle invests further in Poland

This is one of the biggest European shopping centre deals of 2022

NEPI Rockcastle has acquired all the shares in Forum Gdansk, a large shopping centre in Poland’s sixth largest city. With a large catchment area and an occupancy rate of 93%, the property is obviously appealing.

The purchase price is €250 million, of which €50 million is vendor financing payable by NEPI Rockcastle within three years at a fixed rate of 6.5%. The rest of the purchase price was funded from NEPI Rockcastle’s cash resources and credit facilities.

The estimated net operating income of the property is €16.5 million, so that’s a yield of 6.6% on the purchase price.

In further news related to Poland, the acquisition of the Copernicus Shopping Centre became effective as of 19 December, so this means that two high quality retail assets have been added to the portfolio.

Little Bites:

  • Director dealings:
    • An associate of a director of Ethos Capital has acquired shares worth R1.5 million
    • Although several directors of Zeda received shares in the company as part of the unbundling from Barloworld, the interesting news is that a prescribed officer bought another R449k worth of shares.
    • An associate of a director of CA Sales Holdings has acquired shares worth R199k
    • A director of Brimstone has acquired shares worth R41.4k
  • As another reminder of what a large balance sheet actually looks like, Naspers repurchased shares worth R1.3 billion and Prosus repurchased shares worth $267 million. These amounts covered just a few days of repurchases! These repurchases are being funded from a sell-down of the stake in Tencent.
  • To give some context to these numbers, Investec has repurchased shares worth R757 million since 3 October.

Ghost Bites (Bell Equipment | Equites Property Fund | Jubilee Metals | KAP | Woolworths)

The Finance Ghost
-
0
Ghost Bites (Bell Equipment | Equites Property Fund | Jubilee Metals | KAP | Woolworths)

Ringing the Bell

A rally of over 6% in the share price tells you what the market thought of this update

After a great deal of distraction around whether the controlling family will or won’t take the company private at a suitable price, things eventually settled down at Bell Equipment.

Focusing on the operations would’ve paid off for investors, as the share price has climbed nearly 26% this year.

In a trading statement for the year ended December, the company goes a long way towards justifying that share price performance. HEPS is expected to be at least 43% higher at 420 cents, a tasty number on a closing share price of R15.40.

The performance has come from stronger market conditions, which is exactly what shareholders want to see.

To learn more about Bell, take this opportunity to catch up on the Unlock the Stock event with the Bell CEO that we hosted back in March. In this case, it really paid to pay attention:

Equites’ deal with Lidl goes back to the drawing board

The local council has not approved the proposed development

Back in October, Equites Property Fund announced the sale of land in Basingstoke, England to iconic retail group Lidl. The deal was conditional on approval being obtained from the local council for the proposed warehouse developments on the site.

After an initial refusal, Equites’ UK business (Equites Newlands Group) was also unsuccessful in its appeal process. The local council ruled that although demand justifies the development, the visual and landscape impact wasn’t going to work.

Equities Newlands is not going to continue with this transaction, recognising that it needs to go back to the drawing board and come up with a new plan for the site. As the site is carried at cost and doesn’t currently generate any income, there is no change to the distribution per share guidance.

If you want to learn more about Equites, a very recent appearance on our Unlock the Stock platform may be of interest:

Jubilee is going from strength to strength

The CEO calls it a “truly remarkable year” for Jubilee

At operational level, there’s good news from exciting metals group Jubilee. At the Roan copper operations, a water infrastructure upgrade has taken the project back to “nameplate capacity” – the level it was built to operate at. There is also technical progress being made at the Sable Refinery, with solutions being found to improve recovery of copper and cobalt from historical waste and to reduce operating costs.

The new approach at Sable is referred to by the CEO as a “game changer” and allows multiple ores to be produced at once, which is similar to what the company achieved at the Inyoni PGM plant in South Africa.

Having made huge progress in the Southern Copper Strategy in Zambia this year, the focus next year is on what the company calls the Northern Refining Strategy in that country.

I must also note that there are outstanding warrants on the company’s shares. This has nothing to do with traffic fines and everything to do with instruments that give holders the right to subscribe for new shares at a price way below the current traded price. This is dilutive for shareholders.

KAP operational update

The five months to November weren’t easy

KAP operates in tricky conditions, with a difficult South African macroeconomic environment and volatility in input costs. With diverse operations, the group generally wins some and loses some, with a net outcome that hasn’t been enough to get the share price out of a stubborn recent trend.

Here’s an overview of how the businesses are doing:

  • PG Bison is enjoying “robust demand” and all plants operated at capacity
  • Restonic suffered far-less-appealing “subdued demand” and struggled with operating profit margin pressure as well, which is typical when revenue isn’t doing as well as hoped
  • Feltex saw an improved revenue performance as new vehicle assembly volumes picked up, which in turn improved the operating margin
  • Safripol’s profitability declined vs. the prior period due to lower raw material margins and production volumes
  • Unitrans lost a major food contract but still put in a “stable performance” and posted margins that remain below the long-term guided range of 8% – 10%
  • Newly-acquired DriveRisk is running below expectations because of the dollar strength, with related pricing adjustments to customers still to take place

The group is putting in a big effort to mitigate the impact of load shedding and to reduce reliance on Eskom, with construction of a 10 MW PV plant at Safripol Sasolburg completed in November and a 4 MW PV plant approved during this period for PG Bison Boksburg.

Woolworths closes a painful chapter

The sale of David Jones has been announced after much speculation

After exceptional destruction of shareholder value under previous CEO Ian Moir, current CEO Roy Bagattini and his team have been doing their utmost to steady the ship at Woolworths.

Having joined the group in February 2020 – displaying an uncanny ability to start under the worst possible circumstances – Bagattini has taken Woolworths back to basics and back to a share price level not seen since 2018:

The latest step in fixing the group is to offload David Jones, the horrendous investment that tarnished Moir’s career. The buyer is Anchorage Capital Partners, an Australian private equity fund. The fact that this is a voluntary announcement tells you how tiny it has become in the Woolworths context. It wasn’t always this way, so a huge amount of value has been lost forever.

The deal excludes the flagship property in Bourke Street, which Woolworths will retain and lease to David Jones on a long-term basis.

The important thing is that around R17 billion worth of liabilities relating to David Jones will be removed, which will allow the balance sheet to be tilted towards the right activities. Of course, this also gets rid of a distraction for the management team.

The Country Road business in Australia remains core to the group, so this isn’t a complete retreat from the land of kangaroos and broken shareholder dreams.

Little Bites:

  • Director dealings:
    • The family trust of David Hurwitz, CEO of Transaction Capital, has disposed of shares worth R36.4 million to reduce debt to an institutional lender – he could’ve sold them a LOT higher earlier this year
    • Dr Christo Wiese isn’t one to do things in half-measures, buying single stock futures on Shoprite shares with a strike price of R242.14 and a value of R726 million
    • The investment entity of the management team of Ninety One has bought shares worth £92.5k
    • A director of Argent Industrial has sold shares worth R675k
    • The company secretary of Afrocentric has disposed of shares worth R126k
    • Des de Beer bought more shares in Lighthouse, this time worth R125k
    • The interim CEO of Hulamin has acquired shares worth R15.4k
    • An associate of Piet Viljoen has acquired shares in Astoria worth R12.3k
  • Those of you who are particularly interested in climate change and associated Net-Zero targets will find it interesting to learn that Mondi is among the first packaging and paper companies with validated Net-Zero targets. The Science Based Targets Initiative (SBTi) has assessed and approved the targets.
  • In another sad reminder that mining remains a dangerous industry, Harmony reported a loss of life following a seismic incident at the Kusasalethu mine in Carletonville.

Inadequate infrastructure expenditure in the developed world

The Finance Ghost
-
0
Inadequate infrastructure expenditure in the developed world

No rest for the wicked here, as Chris Gilmour unpacks the relative levels of infrastructure development in the emerging world vs. the developed world.

One of the areas that differentiates the developed world from the emerging world is the commitment to infrastructure development. The old developed world is largely stuck with aged, creaking infrastructure that hasn’t moved in line with increased population size, whereas the developing world, as proxied by countries such as China and Malaysia, tends to have far greater commitments to infrastructure development across the spectrum.

And the world’s largest economy, the USA, has one of the world’s worst infrastructural deficits.

Rectifying this situation with a much greater commitment to decent infrastructure spend is “good” investment and reaps all sorts of benefits over time. But neglecting it, even for a few years, can have catastrophic results.

The last really big federal project that the US government embarked upon (apart from NASA’s space program of the 1960s and 1970s) was the interstate freeway system that was constructed in the US from the late 1950s through the early 1970s. Since then, there has been very little of any consequence, and this is obvious to any non-US traveller arriving at the tawdry JFK airport in Queens in New York City. And the road leading into the city from the airport is buckled and mangled, a reflection of the poor maintenance it receives. The bridges across the East River are ancient and only the (relatively) recently constructed Verrazzano Bridge connecting Staten Island and Brooklyn is less than 50 years old.

US utility companies often struggle to keep the lights on and so-called “brownouts” occur, whereby voltage reductions are deliberately put in place to conserve electricity.

According to a fairly recent study by the highly respected American Society of Civil Engineers (ASCE), deteriorating Infrastructure and a growing investment gap will reduce US GDP by $10 trillion in 20 years. In a hard-hitting report released last year, the ASCE said that “Infrastructure inadequacies will stifle US economic growth, cost each American household $3,300 a year, cause the loss of $10 trillion in GDP and lead to a decline of more than $23 trillion in business productivity cumulatively over the next two decades if the U.S. does not close a growing gap in the investments needed for bridges, roads, airports, power grid, water supplies and more.”

As a percentage of GDP, Gross Fixed Capital Formation (GFCF) in the US is a relatively low 21%, which places the US not much higher than Russia in the league table of infrastructure spend:

Source: World Bank / Gilmour Research

The UK (at 17%) is even worse and South Africa is a very low 13%.

Between now and 2039, the ASCE report estimates that nearly $13 trillion is needed across 11 infrastructure areas: highways, bridges, rail, transit, drinking water, stormwater, wastewater, electricity, airports, seaports and inland waterways. With planned investments in infrastructure currently totaling $7.3 trillion, that leaves a $5.6 trillion investment gap by 2039.

This gap has to be filled, and soon!

We are probably entering a new era in state spending globally, one that is going to be funded by substantially higher taxes. The party has been going on too long, with low taxes and little or no decent infrastructure spend. The end result is inevitable – decay and destruction of existing infrastructure.

Not long before he left office, Donald Trump signalled that his administration was intent on spending large amounts of money on new infrastructure. But it’s debatable that he fully grasped just what this would have entailed in terms of higher taxes.

Americans have become used to paying very little tax over the years and it will take a brave president to reverse that situation. But that is precisely what needs to happen.

Britain is in a similar position and if anything, its infrastructure deficit is even worse. A classic example is the rail network. Largely privatised from the late 1970s onwards, much of the rolling stock still appears to date from that era and even earlier. One of the biggest problems facing infrastructure development in the UK is a) the authorities’ obsession with mega-projects and b) concentrating almost all infrastructure development in London and the south-east of England. Some of these are vanity projects such as Crossrail in London, although the most recent large bit of infrastructure development relates to the new nuclear power plant at Hinkley Point in Somerset.  

One of the things that struck me about the state of unreadiness of the developed world when the Sars-CoV-2 virus struck was the lamentable state of hospital and associated infrastructure. This was in stark contrast to how developing countries such as China attacked the situation, building pre-fabricated 1,000-bed hospitals from scratch in a matter of days. But if we use Britain as a proxy for the developed world, its infrastructure was found to be wanting, with the National Health Service (NHS) hospitals at or near breaking point most of the time. To be fair, the authorities did convert other buildings into so-called “Nightingale” hospitals but these were never used. But if we go back in time to 1968-72 with the Hong Kong flu pandemic or 1957 with the Asian flu pandemic, both of these events were easily coped with using existing hospital infrastructure.

The harsh fact of the matter is that health bureaucrats the world over believe that most healthcare problems can be solved via the application of technology, such as virtual doctor appointments etc.

The reality is that they can’t.

So, infrastructure development is likely to be a big factor in future high-level spending priorities if for no other reason than that existing infrastructure really is at the end of its tether. It will be interesting to see how this is paid for ultimately, over and above by higher taxes.

This article reflects the independent views and opinions of Chris Gilmour, which are not necessarily the same as The Finance Ghost’s opinions on these stocks. For equity research on South African retail and other stocks, go to www.gilmour-research.co.za.

Ghost Wrap #6 (MTN + Telcos | Steinhoff | Alviva | Mpact | PBT Group | Shoprite – Massmart | Grand Parade)

The Finance Ghost
-
0
Ghost Wrap #6 (MTN + Telcos | Steinhoff | Alviva | Mpact | PBT Group | Shoprite – Massmart | Grand Parade)

Welcome to Ghost Wrap. It’s fast. It’s fun. It’s informative.

In this week’s episode of Ghost Wrap, we cover:

  • Why the telecoms companies sold off so sharply last week (with a focus on MTN)
  • Steinhoff’s horrible news for shareholders and another crash in the price
  • A firm intention announcement for Alviva to be taken private at R28 per share
  • Mpact’s planned investment of R1.2 billion in Mpumalanga to support fruit exports
  • PBT Group offloading its B-BBEE preference shares to Sanlam Investment Management
  • Shoprite getting the green light to buy (most of) the cash & carry stores from Massmart
  • The board of Grand Parade Investments advising shareholders to accept the offer from GMB

The Ghost Wrap podcast is proudly brought to you by Mazars, a leading international audit, tax and advisory firm with a national footprint within South Africa. Visit the Mazars website for more information.

Listen to the podcast below:

1...136137138...199Page 137 of 199

Focuses on making market news and investment concepts accessible, understandable and fun!

Ghost Mail is free to read

SUBSCRIBE TODAY

Partner with Ghost Mail

CONTACT US

© Ghost Mail

Verified by MonsterInsights